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Activist Investors Force Change In The Oil Industry

Investors are growing impatient with even the largest oil companies, as the FT reported. In the short run, low oil prices, and the threat of higher U.S. shale supply, completely saps investor enthusiasm around the oil industry. But in the long-term, the prospect of peak oil demand is an even larger problem. A deceleration in demand growth, and, ultimately, a decline on an absolute basis, throws into question the valuations of multinational oil and gas companies.

At worst, the majors may not be able to produce all of the oil and gas reserves on their books, and the amount of “stranded assets” could balloon if governments eventually get serious about addressing climate change.

All of that means that investors are losing faith in the case for oil companies large and small. The energy sector badly trailed the broader S&P 500 last year, and glaringly, even lagged the index when oil prices were soaring. “There’s just this hate for this commodity right now,” said Bernstein analyst Bob Bracket, according to the FT. “They don’t want it in the short-run due to the price swings seen in recent years. And in the long-run there are fears about how these companies look in a decade’s time, if the energy transition gathers pace.”

Shareholders are doing their part. The industry is about to enter the annual shareholder meeting season, and the number of climate change-related resolutions up for a vote have ballooned to 75, a record high, according to the Wall Street Journal. That’s up from just 17 in 2013.

In years past, oil executives waived away these shareholder proposals, knocking them as either a distraction, unnecessary or bad for business, or some combination of all three. But shareholders are growing restless as the climate crisis deepens and as the future of the oil industry looks shakier than ever.

It is no longer just environmental or shareholder advocacy groups. Private equity giant BlackRock Inc. and investment firm Vanguard Group, among others in Big Finance, are now backing climate change reporting standards. To be sure, these are minor requests. As the WSJ reports, DowDuPont is facing a proposal at its 2019 meeting that would require more disclosures about the vulnerability to natural disasters at its chemical plant in the Gulf of Mexico.

But climate risk disclosures are becoming much more routine. It was only two years ago that a shareholder resolution passed by shareholders of Occidental Petroleum, calling on the company to assess its vulnerability to climate change, was seen as a major milestone for activist investors. Now those resolutions are arguably viewed as modest steps, the minimum that fossil fuel giants can do.

Now, investors are stepping up their pressure. Royal Dutch Shell was compelled to make changes to the way it compensates senior management. The Anglo-Dutch oil major set greenhouse gas reductions targets, aiming to cut emissions in half by 2050, while also linking executive compensation to meeting those targets. For an oil and gas major, this is a notable development, and could force the acceleration of Shell’s pivot into renewable energy, electric vehicles, and other forms of energy.

The decision came after intense pressure from Climate Action 100+, an investor-led coalition that represents $32 trillion in assets under management. A coalition representing that much capital is bound to post more wins in the months and years ahead.

Meanwhile, the mining giant Glencore also announced a hard cap on its coal production, citing concerns about climate change. It should be noted that as the world’s largest seaborne shipper of coal, supply curtailments could actually tighten up the market and boost prices, which would benefit Glencore. Nonetheless, a cap on coal production and the signal that coal would eventually be phased out, sent shockwaves through the market.

Previously, shareholder activism was aimed at simply forcing oil, gas and coal companies to disclose climate risks – essentially to admit they have a problem. But now, the investor scrutiny is having real world impacts on company operations. In short, more fossil fuels will be left in the ground.

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